DEALMAKER GUEST BLOG -- MICHAEL ELLIS

Considering a sale? Take early steps to protect your talent

Blog Entry: June 12, 2013 4:30 AM | Author: MICHAEL ELLIS

Michael Ellis is a partner in the corporate practice group of Porter Wright Morris & Arthur LLP in Cleveland. He focuses his practice in mergers and acquisitions, partnership agreements and venture capital transactions.

As the country slowly recovers from the economic collapse of 2008 and 2009, more business owners are thinking again about selling their businesses. In many instances, counsel is not hired until after a confidentiality agreement or subsequent letter of intent has been executed.

Business owners may view these agreements as “boilerplate” or non-binding. However, the failure to adequately protect in these agreements the potential seller from the loss of employees may be extremely harmful to the business.

Before making a definitive decision on whether to make an offer for a business, a buyer needs to obtain certain confidential information about the company. This information is not limited to financial information, but includes information regarding the operations of the company and its personnel. In the scope of its investigation, key employees, whether they are engineers, salespeople or programmers, may be identified by the potential buyer.

Unless the initial confidentiality agreement or letter of intent contains a prohibition that precludes the potential bidder from soliciting the employment of such personnel, the bidder may be free to hire such individuals should the bidder elect not to pursue the acquisition. Most confidentiality agreements do not address the issue of employees. By hiring key employees, a potential buyer may achieve some of the goals of an acquisition without making any payment to seller.

In one instance, I am aware of a competitor, contemplating an acquisition, that hired the key engineers of the potential seller when the parties could not agree on price. In this case, the company had neither non-competes with such employees nor an agreement with the potential acquirer against hiring or soliciting the hire of such employees. The loss of its employees significantly affected the potential seller's business, and it took years to recover.

A second employment concern for a business owner in a sale setting is ensuring that the non-compete agreements it has in effect with its employees are transferrable to a buyer. Buyers recognize the value of employees and may condition their offers on obtaining non-competes from certain key employees.

If employees are aware that their non-competes are crucial elements to the sale, they may demand additional compensation or a separate payment from the buyer before executing a non-compete. Buyers are likely to subtract the cost of these payments from the payment due the seller.

Accordingly, it is important that the non-compete agreements a business owner utilizes include a clause that allows these agreements to be assigned, without the need for an employee's consent, to any purchaser of all or substantially all of the assets of the company. In the absence of such a provision, the agreements can't be assigned by the employer without the employee's consent. As noted above, obtaining such consent could be costly.

Including these assignment clauses from the beginning will save the employer from paying for them at the time of a sale.

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